In some cases investors are turning to platforms such as Launchbay, Crowdcube and Caplight, where the above figures are from. Other times it’s the companies themselves arranging off-market sales to help workers get their hands on much-needed cash and boost their valuations along the way.
Nowhere has this work been more important than in the UK, where less than GBP1 billion ($1.71 billion) has been raised in IPOs so far this year, according to data compiled by Bloomberg, and there’s an exodus of companies delisting. Now, officials are pinning their hopes on a new framework for secondary shares to help them revive London’s moribund capital markets.
“Of course we want to attract more listings,” said City Minister Tulip Siddiq in an interview with Bloomberg. Proposals for a new trading option for shares before they go public can act as a “stepping stone” to full stock market listings, according to Siddiq.
The minister said the government’s plan for a regulated secondary market, called Pisces, “marks the next phase of our capital market reforms in our country”, following an array of changes to listing rules meant to stoke fresh demand on the traditional stock markets.
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Legislation for the Pisces plan, which was proposed by the last Conservative government and confirmed last month, will come as soon as next May.
Debuts delayed
Pensions, sovereign wealth funds and the world’s biggest tech companies have grown comfortable backing early-stage companies for the long term. This approach allows start-ups to become giants without ever needing to raise capital from the public markets, but creates problems for smaller investors and early employees, whose stock awards are left in limbo.
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Even in the US where stock markets are booming, the average time from starting a company to launching an IPO is now 15 years, while two decades ago it took an average of five years, said Junaid Baig, co-head of strategy and strategic investments at global markets at BNP Paribas.
There are “almost a thousand unicorns with a worth of around US$3 trillion in the US alone, therefore a lot of wealth that is trapped in the private space,” Baig said.
Pisces, or Private Intermittent Securities and Capital Exchange System, is a rulebook that will allow companies to open trading windows and unlock investor money. While the operators are still to be confirmed, London Stock Exchange Group (LSEG) has already given its support to the idea.
The options will be more limited than a full listing, with companies unable to carry out buybacks or raise fresh capital. At least at first, those buying and selling will need to declare themselves as “sophisticated investors”, closing off ordinary retail shareholders.
Still, firms will be spared the burden of regularly publishing financial results as they would on the public markets, while shareholders who use Pisces will be exempt from the UK’s stamp duty that applies to trades on the main market.
Global competition
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The new system faces competition. Big enough firms can simply start their own sales: London-headquartered Revolut allowed employees to sell shares to new and existing institutional backers this summer, in a deal run by Morgan Stanley that valued the firm at US$45 billion.
Banking start-up Monzo gave employees liquidity for their stakes and valued the company at US$5.9 billion in October.
And for companies seeking a more established system to trade shares, Nasdaq Private Market launched in 2013 and US rival CBOE is preparing its own version. At the smaller end of the scale, sites such as Crowdcube already offer secondary markets for retail investors.
“We are very, very bullish and very pro UK and European private markets and anything that can bolster the private markets in the UK and the EU is a good thing,” said Matt Cooper, co-CEO at Crowdcube. “We are just not clear on which companies this Pisces is solving a problem for.”
“Our view is they’re creating a solution to a problem that is already being met by a fully functioning, good private market regulatory framework in the UK,” Cooper added.
If Pisces does take off, there’s “a risk that the success of the platform might be counter-productive — with some commentators concerned that Pisces provides companies with a ‘comfortable’ alternative to going public sooner,” lawyers at Hogan Lovells wrote.
Among investors, the demand to trade shares in high-growth unlisted firms is already evident. Crowdcube will have completed around GBP20 million in secondary transactions this year, which is more than the last 10 years combined, according to Cooper.
Pisces is one part of a wider overhaul to London’s capital markets to restart activity following the worst year for IPOs in the UK since the 2008 financial crisis. The new Labour government has vowed to prioritise economic growth and reverse what it sees as over-regulation of the finance industry, while taking on the Tories’ work on making UK equities more attractive.
“You add these all up, and give it a bit of time, over the long-term we will see some positive changes,” said Jordan Sinclair, head of trading platform Robinhood UK, which is exploring offering British users the ability to invest in UK stocks.
But still, there’s a way to go. A succession of previous changes to London’s investing rules did little to stoke demand for shares in the city, highlighted by Cambridge-based chipmaker ARM Holdings choosing to go public in New York rather than its home market last year. Consumer credit firm Klarna, which was at one stage Europe’s biggest start-up, said last month it had also filed for an IPO in the US.
Steven Fine, CEO of stockbroker Peel Hunt, said the issue was ultimately one of demand, with investors in UK-listed equities only now showing their first signs of growing appetite in more than three years. “41 consecutive months of outflows, to me that is a horrendous, horrendous statistic,” he said. “We’re letting all our domestic funds flood out the door.”
Chart: Bloomberg
